Oil and gas geopolitics

Andris Piebalgs / Energy Commissioner

Speech at the Lisbon Energy Forum 2007
Lisbon, 2 October 2007

President Mario Soares, Minister Pinho, Ladies and Gentlemen, my great thanks to the organisers for his invitation today in Lisboan.

I have been asked to look into the future. Precisely, what are the scenarios for Europe and what is the Commission's response. I indent to answer that question in the context of security of supply of oil and gas. But first, a few words on the broader context.

Challenges

The energy challenge is one of the greatest challenges we face. Climate change, geopolitical uncertainties, the changing global economic balance: Each of these developments is a different manifestation of another very inconvenient truth: the world's dependence on growing volumes of fossil fuels.

This would be serious enough if we could be sure that the world could supply, and support, the huge volumes of oil and gas which –as all mainstream scenarios suggest - the world will need. A doubling or more in world energy demand by 2030 is seen as the most likely outcome based on today's energy trends.

The geopolitical consequences of rising global demand for oil and gas are difficult to foresee. Oil and gas are unevenly distributed across the globe. Hydrocarbon's transport is often risky and extraction projects are in increasingly inhospitable parts of the globe. Moreover, history tells us that energy interests cause, and aggravate, regional conflicts – Sudan, Chechnya, Nigeria and others.

One of the more tangible impacts we are already seeing is higher oil prices. Most newspapers no longer view oil prices of $80 a barrel as front page material. The less tangible impact is a gradual undermining of good governance, economic stability and energy supply security.

But there are other developments to which we must be alert. Governments in various parts of the world are viewing their energy resources as a strategic instrument, to be used for political ends. 80% of the globe's oil reserves are in the hands of state-controlled entities.

For gas, the countries which form Gas Exporting Countries' Forum account for 73% of the world's known gas reserves. The risk here is that transparency and the rule of law are compromised by political ambition.

Moreover, some nations are using political and economic power to buy into external energy reserves. In others, governments are using energy subsidies to buoy up their popularity, leading to spiralling demand and wastage. This may have a detrimental effect on sustainable economic development in some of the world´s most vulnerable regions.

Each of these developments undermines the creation of a stable, predictable and transparent global energy market. How can the EU develop an energy policy which can reduce the risks of insecurity, imbalance and uncertainty?

Risks to EU

Europe accounts for around one seventh of energy consumption in the world – a large share, but falling, in relative terms. We are dependent on imports for over one half of our energy use. The role of developing countries in global markets is increasing as their energy demand rises far more quickly than ours.

This is particularly true for oil: future oil supplies, which are more and more concentrated in a handful of countries, often exposed to high geopolitical risks, may not be sufficient to meet this quickly rising demand. As a result, the risk of oil supply disruptions is increasing, especially if large developing countries do not adopt appropriate emergency response policies.

The provision of energy to the populations is becoming more complex, for governments and companies alike. For the EU our challenge is to turn our economic weight into political muscle in the global arena. If we fail, someone else will decide the rules for us.

The first thing which the EU has to do is develop a common energy agenda. This is why the new EU energy policy, endorsed by Heads of State and Government in March, and the new Energy Article which the new Reform Treaty should contain, once ratified, are so important.

The new EU energy policy is a significant step forward. Member States are committed to a common strategic energy and climate targets, an integrated European energy market and to speaking with a common voice in international relations. The latter – a common voice - is absolutely essential if the EU is to rise to the challenges of oil and gas geopolitics. We now need to find the actions to match the words.

Role of EU

The starting point of the new strategy is a firm commitment to reduce greenhouse gas emissions by 20% by 2020, or more, by 30%, if our international partners follow suit.

This is a massive challenge; not only to the EU, to make it a reality; but it also lays down the gauntlet to the international community, to deliver on an international agreement to tackle climate change. Our message is simple. We will not deal with climate change on our own. But together, we have a chance. And the way to do so, is through an integrated energy and environment strategy.

A key element of this is new EU energy agenda is the need of a real functioning internal market for electricity and natural gas. In this context, one of the actions we have taken is the adoption on the 19th September of the legislative package concerning our internal energy market. The measures contained therein will create the right conditions for a flourishing and competitive energy market, one which is attractive for suppliers to bring their gas to.

But a secure and sustainable energy market will require new investment in infrastructure. We need to work towards a European gas network and a European electricity grid. One of the crucial structural changes therefore is the proposal to truly and effectively separate network operation from supply and production of gas and electricity. This so-called unbundling has a dimension regarding non-EU investors as well however.

Because of the strategic importance for the competitiveness of the EU economy and for the well-being of the citizens of the European Community, safeguards have been proposed to ensure that third country individuals and countries cannot acquire control over Community networks unless this is permitted by an agreement between the EU and the third country. The aim is of course not to discriminate against companies from third countries, only to guarantee that they respect the same rules that apply to our own undertakings. Put simply, the Commission considers that, like our main trading partners, we have to act decisively to ensure that the interests of our citizens are fully protected.

What else can the EU in practice do to reduce the geopolitical risks to oil and gas?

The short answer is cooperation. But not superficial cooperation where Member States carry out their own agendas. On the contrary, Member States have accepted that the EU can be more effective internationally if it works together. They also recognise that the EU's concerns coincide to a large extent with national, Member State, concerns; and that national decisions have an impact on other Member States. And they also agree that the EU can help governments achieve national objectives.

This was particularly noticeable at the June European Council, which stressed the need to work in solidarity in the energy area. In other words, a crisis for one Member State is a crisis for the EU.

This is why Member States have asked the Commission to develop measures for the EU to speak with a common voice in energy policy with its international partners. This sentiment has been translated into the new Reform Treaty for the European Union, in which energy security and interconnection have become basic elements of European solidarity.

To do this means moving away from the traditional perception that energy is a national security issue – it is a European security issue.

An example of enhanced cooperation is also part of the legislative proposals we have recently unveiled. Member States are expected to cooperate in order to promote regional and bilateral solidarity and should cover situations which would have the potential to result in severe disruptions of gas supply. For oil supply disruptions we already have an emergency stock mechanism.

The Commission is currently analysing the shortcomings of this system, which is nearly 40 years old, and will propose how best to change the existing legislation in order to provide an even better assurance in case of a crisis.

Other examples of cooperation can be found in the EU's ongoing energy dialogues – with Russia, OPEC, Algeria and Norway - have given us a rich experience in dealing with partners whose political structures and economic priorities are different from our own. We are also developing new initiatives with alternative suppliers, in the Caspian Basin, Central Asia, North Africa and South America.

These relationships or dialogues will be needed to deal with the explosive projected demand for oil and other hydrocarbons. The International Energy Agency predicts that global oil demand could increase over the coming years by 1.9% per annum. This means 33 million barrels of oil per day more moving around the world by 2030.

Record high oil price these days is a good indicator for difficult times ahead for us. Particular challenge for the EU is natural gas supply.

In 10 years from 1995 to 2005, natural gas consumption in the EU countries has increased from 369 billions m3 to 510 billion m3 year. At the same time, EU own production has peaked in the year 2000 with the peaking of the proven reserves in the same year. As a result, EU produces in 2005, 212 billions m3 of natural gas. Growing consumption, decreasing production brought increase of imports from 161 billion m3 in year 1995 to 298 billion m3 in year 2005. In these years imports from Russia increased by 15%, imports from Norway and Algeria even doubled.

But in the last 10 years, there have been also remarkable changes in the global gas market: the amount of the proven reserves has increased by 20%; there are more and more countries producing natural gas; LNG technology allows to bring natural gas to the EU market even from Trinidad and Tobago and Malaysia.

We know that need for more gas in the EU will grow significantly in the years to come and we cannot assume for granted that today’s suppliers will satisfy all our tomorrow’s demand.

Examples of dialogue

Building on this cooperation requires taking into account the specificities of each partner.

Our energy dialogue with Russia is fundamental to both the EU and Russia. Energy products represent more than 60% of Russia’s overall exports to the EU.  60% of Russia’s oil exports go the EU, representing over 25% of total EU oil consumption. In addition, 50% of Russia’s natural gas exports arrive in the EU, representing around one quarter of total EU natural gas consumption. This is why we must give priority to developing a post-Partnership and Cooperation Agreement with Russia with an important energy element. It is also why we should continue to pursue the principles of the Energy Charter in our energy relations with Russia and continue to argue for its ratification by Russia.

With OPEC, our experience has been positive, and we have a fruitful dialogue with regular collaboration on subjects as diverse as technology, climate change and financial markets.

And we expect to progress and finalise negotiations on a Strategic Energy Partnership Agreement with Algeria in the course of next year.

A key test for the EU´s future security will be how we tackle geopolitics in Central Asia. Work is proceeding to implement our new agreements with Kazakhstan and Azerbaijan as alternative energy suppliers, and we are exploring the possibilities of enhancing energy cooperation to achieve a more formalised bilateral energy dialogue with Turkmenistan. The guiding principles – as ever - are transparency, reciprocity and rule of law.

As regards transit countries, in addition to the implementation of the EU Ukraine Memorandum of Understanding on energy, we expect to launch energy technical cooperation and an early warning mechanism with Belarus.

Oil and gas geopolitics could have a dramatic impact on Africa, which could take on a strategically important role in global – and EU - energy markets. We hope to finalise a new partnership agreement at the end of this year, in which energy will be a key element. I would particularly like to acknowledge the support of the Portuguese Presidency in helping us take forward this important initiative.

There is another side to security of supply which is important, not least to our existing suppliers, and that is security of demand. I know that some of our suppliers have inferred that a shift to renewables undermines oil and gas markets. I do not agree.

My message to them is clear: Even with our policies to increase the use of renewable energy in the economy, to reduce carbon emissions and save a significant share of energy consumption, we are still likely to need higher gas and oil imports in the future. Diversifying supplies towards renewable energy will increase, not decrease, global energy market security.

But security of supply also depends on management of demand. The argument is simple: The more stable and predictable is the demand, the less the risk of market – and geopolitical – tension. This is why dialogue with consuming countries is becoming more important to external energy relations. Energy has become an integral part of the EU's relations with China, India, the US and Japan. And the EU hopes to complete work on its international energy efficiency initiative next year.

Outputs of cooperation

The goals of our energy collaboration are clear – greater stability for investors; greater predictability in supply and demand; recognition of mutual interests among suppliers and consumers; and the reduction of risk to energy supplies. But we also see energy cooperation as a pre-requisite for dealing with some of the most complex political issues of our time – climate change, geopolitical threats and terrorism.

I believe that the EU vision is unique. We see a future based on international cooperation and coalition building, one where energy consumers and suppliers work together in a spirit of mutual respect, transparency and interests.

I welcome the recognition that the IEA, and other organisations – NATO, the G8, the Africa Union and ASEAN – have given to energy collaboration, to the need to build up energy relations at the regional and international levels.

Energy security and geopolitical security are two sides of the same coin. Let us ensure that our energy actions are a motor for stability, prosperity and peace.

Thank you, ladies and gentlemen, for your attention.

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